Looking back through time, September and October have been the most difficult months for investors. If there is a big drop in the equity markets, chances are, it’ll happen during these two months. Well touch wood, one down, and one to go, with September being a decent month for most investors. Global equity markets were mostly higher, while Canadian fixed income markets closed lower on rising yields.
Turning to our model portfolios, each finished in positive territory. Our Conservative Portfolio rose by 0.1%, our Balanced Portfolio was higher by 0.4%, and our Growth Portfolio gained 1.2%. For a detailed review of the portfolios’ performance and risk reward metrics, you can download our standard monthly portfolio report here. Additional detail can be found in these reports generated by Morningstar. A summary report can be downloaded here, while the more detailed report can be downloaded here.
Canadian fixed income markets faced headwinds as Bank of Canada governor Stephen Poloz once again raised the benchmark overnight lending rate. The latest 25 basis point hike reversed the two emergency cuts made in 2015 in the aftermath of the oil price collapse, bringing them back to early 2015 levels.
With upward pressure on yields, bond prices fell, as the FTSE/TMX Canada Universe Bond Index fell by 1.3%. Corporate bonds, with their higher yields and modestly lower duration outpaced government bonds. The FTSE/TMX All Corporate Bond Index was lower by 1.1%, compared with governments which were down by 1.4%. Short-term bonds, long thought to be a safe haven once again showed investors you can lose money in “safe” investments, dropping 0.5% on the month.
In the portfolios, our bond holdings were down, but did better than their benchmarks. The Dynamic Advantage Bond dropped by 0.55% as a result of its very conservative positioning. I had been very frustrated with this fund in the past, but knew the reason I had it in the portfolio was exactly for times like these.
Looking ahead, the path of future rate hikes in Canada is much less clear. Mr. Poloz stated the next rate move will be dependent on the data, and could be in either direction. Street economists are split on the future, with some calling for a rate cut before year end, while others expecting a pause before continuing the march higher towards normalization. In this environment, I am continuing to remain cautious.
Equity markets were largely positive. The S&P/TSX rose by more than 3%, thanks largely to a sharp gain in the energy sector. With oil gaining nearly 10%, energy stocks followed, as the S&P/TSX Capped Energy Index rose by nearly 12%. While this was a positive for the broader markets, it was less so for our Canadian equity holdings, which trailed the TSX largely on their underweight allocations to energy.
The S&P 500 gained 2.1% in U.S. dollar terms, but with the rising yields in Canada, the dollar was pushed higher, muting gains in Canadian dollar terms. In Canadian terms, the rise in the S&P 50 was 1.8%. Other global markets were also higher, as the MSCI EAFE Index gained 2.3%, Europe rose by more than 3.3%, and Asia gained around 1%.
Looking ahead, I remain cautious, but not bearish. I expect we will continue to see more volatility in the fixed income markets. The U.S. Federal Reserve is widely expected to raise rates again in December, while here at home, traders will be glued to Mr. Poloz, and the economic data for any hint of what the next move might be. This has the potential to see some significant moves in prices as traders look to be ahead of the curve.
In the equity markets, valuations remain high, but with global economic growth continuing to march higher, and rates remaining low by historical standards, there is no need to panic. The Canadian economy appears to be taking a breather, which may be a drag on stock prices heading into the end of the year. Elsewhere, growth appears to be positive, which should help to support equity markets.
The biggest risks to the markets are geopolitical. With a U.S. president who can very charitably be called irrational at the helm, tweeting without thinking, and continuing to poke North Korea, risks remain high. For Canada, NAFTA negotiations appear to have been set up to fail, which could create potential trade barriers with our U.S. neighbours. This could certainly impact both our economy and our markets in a very negative way.
Turning to our portfolios, despite the recent underperformance, I am comfortable in their positioning. My focus is on risk management, and I believe that most of the funds in the portfolios have a strong emphasis on risk management. These are the funds I want to hold when things get volatile, and while volatility may not be imminent, I believe the risks for higher volatility remain elevated.